What Are Robo Advisors?

Robo Advisors Want Millennial Clients — So Should You Invest With Them?

Most millennials don’t look at finances the same way their parents did. As this generation puts off marriage and kids, planning for the financial future is taking a backseat to figuring out how to stretch paychecks to cover rent, groceries, and student loans while still being able to pay for drinks with friends. Investing seems downright unaffordable (and not exactly user-friendly) to a generation whose median net worth is $10,400. Which might be why just 26% of people under 30 are investing in stocks.

Another reason? A recent survey found that of millennials' top 10 most hated brands, four were banks. But, what if you could get for free (or very cheap) the kind of financial advice and investing services that the wealthy have access to? What if it showed up via a digital platform that feels and looks more like shopping for an Apple product (clean, pretty, straightforward) than navigating the stodgy financial sites of our parents’ generation? That’s what a new crop of financial companies are promising, with an eye toward attracting millennial clients in particular.

Automated investment and adviser services, dubbed “robo advisors,” are websites that invest money into stocks and bonds based on your answers to a few questions — like your age, your salary, and how risk-averse you are. The funds are automatically maintained through the software, constantly readjusting and reinvesting depending on how aggressive you want them to be.

Jon Stein, the CEO of Betterment, which launched in 2010, just wanted to build the kind of investment company he would want to use. When he graduated from college in 2001, he hadn’t planned to go into finance; he just kind of ended up there. “I saw a lot of bad practices,” he says. “I saw that banks weren’t really interested in customers, and I don’t think I was alone in that viewpoint. Certainly post-2008 everyone came to dislike the financial system.”

Stein saw an opportunity and harnessed technology to build a new kind of investing product. “Millennials, myself included, expect to have a lot of things automated for them. We believe tech is there to make our lives better. So I thought, why not use it to make investing better?”

Today, Betterment manages over $2.2 billion in customer assets, and its average customer is 36 years old. Most financial firms don’t actively look for clients under the age of 40.

Since Betterment’s launch, its gotten some competition in the marketplace. Wealthfront popped up in 2011, and in 2013 the firm brought on CEO Adam Nash, a veteran of Apple, eBay, and LinkedIn. “We’re convinced that this space is a generational phenomenon,” says Nash. “We see it in our data — 60% of our clients are under 35, and 90% are under 50.”

Most recently, WiseBanyan, co-founded by Vicki Zhou, a former biomedical-device engineer, and Herbert Moore, a former hedge fund manager, joined the scene in 2013.

Attractive, user-friendly websites are one way these companies are targeting millennial clients, but they’re also lowering one of the biggest traditional barriers to entry for investing: costs. You can start an account at Betterment or WiseBanyan with no minimum deposit. Wealthfront requires a $5,000 initial deposit, which could keep some young people from starting there — but that's still multiple times less than starting an advisor fund at, say, Edward Jones, which requires a $50,000 minimum deposit. The maintenance fees at all three companies are also minimal compared to traditional financial advisor services, which usually cost about 1% of your account, according to a report by Pricemetrix, Inc. Betterment charges between 0.15% and 0.35% depending on your account size, plus a $3 per month fee that can be waived with an auto-deposit of $100 per month. Wealthfront accounts are free between $5,000 and $15,000 and then charge 0.25% annually for larger accounts. WiseBanyan accounts are completely fee-free; the company will only charge for add-on products that are still being developed.

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The heads of all three companies couched their efforts as a mission to democratize investing. Zhou says:

We created WiseBanyan with the goal to help people invest as early as possible, which is why we have no minimum — you could start with $10 — and why we don’t charge fees. Being able to invest is one of the best ways to grow your wealth, and a lot of individuals don’t have access to do that unless they have more assets or they are later in life. If we can achieve that earlier, we can use this technology to empower people.

Their language might be mission-based, but these companies also stand to make quite a bit of money if they succeed in hooking a client base the traditional financial sector has ignored.

Stein says, “not only do I think this is the best place to invest, regardless of how much money you have, but our tools continue to become more and more sophisticated over time. We actually already have built a retirement-income tool for our older customers.”

Illustrated by Mary Galloway.

Financial planners are skeptical of whether these “robo advisers” can take the place of a human relationship. Sophia Bera, a certified financial planner who founded Gen Y Planning, a firm focused on a millennial clientele, has mixed feelings about the rise of automated investment companies. “Investment advice can be commoditized,” she says, “but financial planning cannot.”

“The problem is that people hear that they should do something with their money, and investing seems fun and sexy! What’s not so sexy is paying off your student loans, but a lot of times that may be the better financial choice. So that might be helpful to talk about with someone,” says Bera. Still, she does see the benefit of investment automation, and is actually starting to work with Betterment Institutional, an arm of Betterment that will offer its automatic asset management services to financial planners who manage client accounts.

Analysts are also cautiously optimistic about these products. Tricia Rothschild, head of global advisor solutions at Morningstar, an independent investment research company in Chicago, says to do your homework before trusting any company with your money.

“Look into how well-capitalized the firm is,” she says. “And make sure you understand the investment methodology…what’s in their investment offerings.”

At the same time, Rothschild says:

The whole trend toward more automated advice solutions is an evolution that's been going on since mutual funds opened up Wall Street to Main Street. Investing used to be expensive and complicated; these [robo advisers] are continuing that trend to make investing more accessible. For a young person to be thinking about putting money away as soon as possible, that’s overall a very positive trend.